Tuesday July 23, 2013 09:10
When gold investors liquidate positions in a violent fashion, gold bulls have traditionally been able to rely on increased consumer demand to support prices. Indian consumers in particular have a reputation of stocking up during gold selloffs for upcoming weddings and other functions where gifting gold is standard.
India is probably the most important county in the world when it comes to gold, and for good reason: Indians are the largest holder of gold in the world; gold is estimated to make up 7% of all Indian household savings; India is currently the largest consumer of gold in the world accounting for approximately 30% of demand; over 90% of India’s gold is imported; from 2001-2011 India’s population grew 17.7%; by 2030 India is expected to be the most populated county in the world (Source: World Gold Counsel, Census of India).
For hundreds of years Indians have relied on gold for savings. In addition, dowry, a payment from the bride's family to the groom's family upon marriage, is usually made in gold.
The Indian marriage season, of around 10 million weddings annually, runs from October to January and April to May. Gold in the form of dowry often accounts for up to 50% of wedding expenses. Gold is traditionally gifted to the bride as well.
Rupee/U.S. Dollar exchange rate from 1973 to present.
As important as gold is to India’s culture, the Indian government is aiming to reduce the country’s gold consumption in an attempt to rein in the current account deficit (CAD), which is negatively impacting the Rupee and the overall Indian economy. There have been two increases in gold import duties this year alone, with the most recent in early June, which took the duty from 6% to 8%. In addition to the 8%, Indian gold buyers also have to pay a 1% tax on cash gold purchases (of less than 10 grams), as well as a 1% VAT tax. If this isn’t enough, an all-time-low in the Rupee has made gold more expensive on a relative basis (Figure 1.1). While gold is down 18% in USD since April 11th, gold is only down 10% in Rupees (Figure 1.2).
A 10% net tax and an all-time-weak Rupee are expected to have a significant effect on gold demand. Bloomberg estimates Indian gold imports will be down 15-20% this year.
Spot gold in Rupees over the last year.
According to Indian jewelers, some of this stifled gold demand is making its way into diamonds, of which India already accounts for over 10% of global demand. But diamonds have also recently been hit with new taxes. Last year, new legislation introduced a 2% tax on polished diamond imports -previously there were no duties on diamonds. In addition to the new tax, the weak Rupee has the same effect on diamond purchases as it does on gold.
If you aren’t already watching, it’s worth keeping an eye on the Rupee and the Indian CAD if you track gold or diamonds. A bid in the Rupee means more purchasing power for Indians buying gold and diamonds, and a shrinking CAD could eventually lead to easing of import duties; both of which could significantly impact gold and diamond prices.
By Paul Zimnisky